Wednesday, September 05, 2012

Stocks Slightly Lower into Final Hour on Rising Global Growth Fears, Transports Sector Weakness, US "Fiscal Cliff" Worries, High Food/Energy Prices


Broad Market Tone:

  • Advance/Decline Line: Lower
  • Sector Performance: Mixed
  • Volume: Light
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 17.72 -1.45%
  • ISE Sentiment Index 153.0 +50.0%
  • Total Put/Call .90 +1.12%
  • NYSE Arms .85 -37.72%
Credit Investor Angst:
  • North American Investment Grade CDS Index 100.35 bps -.68%
  • European Financial Sector CDS Index 232.81 bps -2.47%
  • Western Europe Sovereign Debt CDS Index 219.73 -1.85%
  • Emerging Market CDS Index 235.74 -2.46%
  • 2-Year Swap Spread 16.5 +.5 basis point
  • TED Spread 30.75 -1.25 basis points
  • 3-Month EUR/USD Cross-Currency Basis Swap -30.5 -3.25 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .10% +1 basis point
  • Yield Curve 135.0 +1 basis point
  • China Import Iron Ore Spot $86.70/Metric Tonne -.23%
  • Citi US Economic Surprise Index -2.0 +.8 point
  • 10-Year TIPS Spread 2.30 +3 basis points
Overseas Futures:
  • Nikkei Futures: Indicating +7 open in Japan
  • DAX Futures: Indicating -7 open in Germany
Portfolio:
  • Slightly Higher: On gains in my Retail sector longs and Emerging Markets shorts
  • Disclosed Trades: None
  • Market Exposure: 50% Net Long
BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower on eurozone debt angst, high food/energy prices, US "fiscal cliff" worries and rising global growth fears. On the positive side, Steel, Coal, Education and Airline shares are especially strong, rising more than +.75%. Copper is gaining +1.5%, the UBS-Bloomberg Ag Spot Index is down -1.3% and Gold is falling -.2%. The 10Y Yld is rising +2 bps to 1.59%. The Germany sovereign cds is down -.8% to 58.85 bps, the France sovereign cds is down -1.3% to 131.25 bps, the Spain sovereign cds is down -4.2% to 451.50 bps and the Italy sovereign cds is down -6.0% to 395.51 bps. Moreover, the European Investment Grade CDS Index is down -2.1% to 140.14 bps, the Spain 10Y Yld is down -2.4% to 6.41% and the Italian/German 10Y Yld Spread is down -5.6% to 403.55 bps. On the negative side, Alt Energy, Oil Tanker, Energy, Semi, Disk Drive, Networking, Medical Equipment and Road & Rail shares are especially weak, falling more than -.75%. Transport shares have traded poorly throughout the day again. Major Asian indices fell overnight, led lower by a -1.74% decline in South Korea. The Nikkei fell another -1.1% and is down -4.3% in 5 days. The Shanghai Comp fell another -.3% to the lowest level since early March 2009. This index is now down -7.4% ytd and down -15.7% over the last 12 months. The UBS/Bloomberg Ag Spot Index is up +25.0% since 6/1. The benchmark China Iron/Ore Spot Index is down -52.1% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index is also picking up downside steam. As well, despite their recent bounces off the lows, the euro, copper and lumber all continue to trade poorly given equity investor perceptions that the Eurozone has successfully kicked-the-can and global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +2.5%. US Trucking Traffic continues to soften. Moreover, the weekly MBA Home Purchase Applications Index has declined in 6 out of the last 7 weeks and has been around the same level since May 2010 despite investor perceptions of a big improvement in the nationwide housing market. The Baltic Dry Index has plunged around -65.0% from its Oct. 14th high and is now down around -60.0% ytd. Shanghai Copper Inventories have risen +119% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 22.50 industry-standard worldscale points, which is the lowest since May, 2009. The 10Y T-Note continues to trade too well. There still appears to be a fairly high level of complacency among US investors regarding the deteriorating macro backdrop. It remains unclear to me whether or not Germany will destroy its own balance sheet or allow the ECB to monetize debt in a major way in an attempt to "save" the euro even as investors have been pricing this outcome into stocks. Massive tax hikes and spending cuts are still yet to hit in several key eurozone countries that are already in recession. A lack of economic competitiveness and growth incentives remain unaddressed problems. The European debt crisis is also really affecting emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades over the intermediate-term. I continue to believe that China's problems are much larger than commonly perceived and cannot be solved with another massive stimulus package given their real estate bubble, soaring food prices, massive overcapacity in certain key parts of the economy and growing bad loans problem. I continue to believe QE3 would be a major mistake given the recent surge in stock prices, rising inflation expectations, rising gas prices, worrisome food crisis headlines and less pessimistic US economic data. Little being discussed by global central bankers will actually boost global economic growth to an extent that overcomes the growing macro headwinds over the intermediate-term, in my opinion. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff" and the election outcome uncertainty will likely become more and more of a focus for US investors as the year progresses. The explosion higher in the Israel sovereign cds(+31 bps in about 3 weeks to 165.0 bps) is another big red flag. The Mid-east appears to be unraveling again at an alarming rate. The quality of the stock rally off the June lows remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/lumber/transports relative weakness all continue to be concerns. Thus, recent market p/e multiple expansion on global central bank stimulus/action hopes, is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. For this year's equity advance to regain traction, I would expect to see further European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower food/energy prices, a US "fiscal cliff" solution, a calming in Mid-east tensions and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on eurozone debt angst, profit-taking, more shorting, high food/energy prices, US "fiscal cliff" concerns, growing Mid-east unrest, technical selling and rising global growth fears.

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